The Economic Impacts of Natural Disasters on Developing Countries Authors: J. L. Bayer and R. Mechler

2.1The Economic Impacts of Natural Disasters on Developing Countries

Global losses are increasing Source: Munich Re 2004

Global Direct Losses ( ) Source: Munich Re (2000)

Developing countries with over 1 billion USD natural disaster losses over the period IIASA chart by L. Martin 2001 Data sources: Munich Re 1998; Munich Re 1999

Impacts of disasters in developed and developing countries Source: Munich Re 2000

Macroeconomic consequences of disasters Source: IIASA (Freeman, Martin, Mechler, Warner with Hausmann 2002)

Who bears the losses? Sources: IIASA (Linneroth-Bayer et al. 2003)

Public infrastructure losses Can be a significant proportion of losses; Without timely reconstruction can cause long-term reductions in economic growth; Need improved financial planning for assuring post- event funds Financial hedging instruments available Kobe (Source: EQE)

Importance of mitigation Mitigation can bring about large benefits in terms of saving lives and preventing economic losses. Scattered evidence exists in The Philippines Jamaica and the Dominican Republic China Worldwide

Households Businesses Agriculture Private Market Risk Transfer Donors and Lenders Domestic and International assistance International Financial Institutions Government Collective loss sharing Public Sector Loss sharing and risk transfer Informal sector Family, neighbors Victims

Global insured losses ( ) Source: Munich Re (2000)

Government assistance Government financed housing reconstruction after the 2001 floods in Hungary after the 2001 floods in Hungary Source: IIASA, Linnerooth-Bayer and Vari, 2003

Family, friends and donors Source: Mechler 2003

Macroeconomic management issues How can catastrophe risk management be part of general macroeconomic management? How can sufficient domestic and foreign financial resources be mobilized? How can relief and reconstruction needs be combined with prudent macroeconomic management (inflation, reserves, deficit, indebtedness)? From the standpoint of macroeconomic policy, the key question is how much and how rapidly can the government afford to borrow to finance the reconstruction costs, while keeping fiscal policy on a sustainable path. (IMF & WB staff assessment of the macroeconomic effects of the earthquakes in El Salvador 2001)

Microeconomic management issues Who should bear the responsibility for disaster risks facing households and businesses? Efficiency argument: Disaster risks should be mainly the responsibility of those who are located in high-risk areas to discourage settlement in these areas and to encourage individual mitigation measures. Equity argument: Many persons living or working in high-risk areas are poor and unable to take loss-reduction measures, purchase insurance or relocate to safer areas. There is a need for social solidarity with disaster victims. Woman who lost her home in the 2001 Hungarian flood